Running a business is almost impossible without making certain expenses. Expenditures are a necessary evil.

If you’re new to the world of entrepreneurship, you may be uncertain about what is and isn’t a business expense. Additionally, you might also be looking for optimal ways of handling such expenses.

What Is a Business Expense?

From the standpoint of calculating taxes, an expense can be anything that benefits your business in terms of profits. This could include things like making a trip to visit the client from your office, or the printing costs of an ad that you need to run in the local newspaper.

These kinds of expenses, however, are tax-deductible and can be omitted from your total profits when declaring them. Other costs such as purchasing office equipment or hosting staff parties may not be tax-deductible, but will need to be tracked in order to keep your cash flow healthy.

Commuting to and from work is not a tax-deductible expense, unless the employee has to undertake work-related travel to places apart from the office. Traveling to conduct business activities is deductible.

Overnight stays in hotels by you or your staff due to business reasons can be claimed as a tax-deductible expense, provided the expenses can be rationalized. Accommodation and meals can be considered, but bar-hopping cannot.

Analyzing Expenses

In order to be better in control of your business expenses, it makes sense to know where you’re spending too much and how that expenditure can be curbed. Analyzing expense trends is one way of doing so. This, however, requires special skills.

If you have hired a CFO for your business, he should be able to do this for you. An experienced financial controller will be able to help you as well. But, if you plan to do it yourself, here’s how you can go about it:

  • Study the Income Statement
    It is crucial that you calculate the dollar amounts and percentages of revenue for every line item in the operating expenses. You can generate such reports with the help of your accounting software. Compare the numbers to that of the previous month, the past three months, the average of the last three months, average year-to-date and the same month in the previous year.Once you have the differences in the amounts right, consider the reasons for those differences, especially if your expenses have shown a rise. Analyze why the excess money was spent and the steps that can be taken to minimize/stop those expenses.
  • Correlate Your Actual Cost to Your Budget
    Creating and adhering to your budget when running a business is an important financial management exercise. It can go a long way in helping you manage your finances and the factors that drive your expenses. Don’t fret if you find that your actual costs and budgeted costs are not in tandem, as they’ll rarely ever be. As long as you understand the reasons behind your line items going way over the budget, you’ll know your problem areas and how to fix them.
  • Put It on the Board
    Do the number-crunching and work out the trends and forecasts related to profits, expenses, revenue, cash flow, etc. and assemble them on a dashboard where they are easily accessible and readable. There are several Web-based dashboards available today, which can be used to squeeze out all required data from your accounting software and display it automatically. Having updated financial data ready before your eyes will allow you to identify emerging trends and problems easily.
  • Size Yourself Up
    If there’s one thing that is critical for a solo entrepreneur to run his business, it is getting hold of reliable and pertinent industry numbers. This, however, will entail a good amount of expenditure, which will be worth it. Other sources of data could include industry trade associations and other local businesses (not competitors) that are around the same size as yours. Speaking to them will give you a fair idea of costs such as rents, salaries and other services in your location.

Managing costs can be a tricky affair, which is why entrepreneurs employ several strategies to control expenses and gear up for unexpected outlays that threaten to spring up. Here’s what you can do:

  1. Embrace Automation
    You’re running a business in the 21st century and if you’re still carrying out critical business processes manually, you need to get automated today! Using accounting software will make it easy to run your business to a great extent by simplifying tracking and managing your expenses. If your accountant is already using one, make sure you get the same software. That way it will be easy to import information directly during your tax return. If you cannot afford an accounting program, use the spreadsheet templates devised by MS Office.
  2. Plan for Taxes
    Just because it isn’t tax time yet, does not mean you shouldn’t already start preparing for it. Make sure to record every expense you plan to deduct on your business taxes, such as office equipment and supplies, travel, business use of vehicles, association fees and charitable contributions accurately.Apart from that, do make a clear record of who you entertain at your company’s costs. The record should include the person’s name, company and the reason for entertaining.Having these records handy will be extremely beneficial during tax time, especially if the tax authorities reconsider your return at a later time. Proper documentation of such receipts will provide a clear audit trajectory justifying your claims.
  1. Keep the Personal and the Professional Separate
    Always, and we mean always, keep your personal finances separate from your business finances. Whether it is cash, checking accounts or credit cards, never make the mistake of mixing your funds. Even if you reimburse yourself or your staff for business expenditures, merging them will add unnecessary complexity in managing your finances. Plus, it can also expose your business to IRS scrutiny.It is best to have separate bank accounts for personal and company funds from the very beginning. Go for banks that charges a low fee for business banking. It makes sense to get an account with an optional overdraft in case of emergencies.It is highly recommended to use a business credit card to pay for business expenses as that will help you streamline your expense records on a monthly, quarterly and annual basis.
  1. Calculate the Cash
    Petty cash expenditures can lead to tremendous confusion in your accounts if they aren’t tracked adequately. Restrict the use of petty cash, and use it only when absolutely necessary. Put someone trustworthy in charge of handling your petty cash expenditures. You can also create a cash account in your accounting software and track cash expenses easily.
  1. Keep the Receipts
    If you’re always tossing away those receipts every time you make a purchase, you could be heading for trouble. These receipts can come in handy during tax time. You’ll need them to document tax-deductible expenses in case you’re audited.On each receipt, mention the purpose of the expense. Make sure to record the receipts as soon as you get them. Regular documentation, will save you a lot of time in the long term and ensure that your financial data is up to date.Digitizing these receipts by scanning them or snapping them on your smartphone will help you save storage space and organize them better. You can save them as images or PDF documents and file them online.
  1. Make Technology Work for You
    Thanks to technological advancements, the most complex processes can be simplified with a little common sense. There are a plethora of mobile apps and cloud-based solutions that enable you to monitor your expenses and categorize them along with specific projects/clients. If you can get an app that integrates with your accounting software, you may have a winner!
  1. Keep Your Eyes Open
    Never lose focus and always keep a keen eye on your business finances. Use your accounting software to create financial reports on a weekly and/or monthly basis to track your cash flow. Learn from your experiences and develop a budget accordingly. Monitor your expenditures on a regular basis to ensure that they are well-aligned with your budget.
  1. Cut Back Where You Can
    If your business expenses are spiraling out of control, or if you aren’t making enough margins, you need to sit down and take a hard look at each of your expenses. Figure out where you can curtail them, starting with expenses that do not directly contribute to the bottom line of your company.

Conclusion

No entrepreneur should take business expenses lightly. Staying ahead of the game will always work in your favor. Maintaining tight control over your fixed and variable costs will prove to be extremely helpful in maximizing your earnings and revenue. Using reliable and hood-quality accounting software will make things easier for you. Handling business costs can be incredibly overwhelming for a newbie entrepreneur. But, by understanding the various elements at play will bring you the desired result. The above pointers should help you identify and plug the problem areas in your business, thereby allowing you to rake in profits and enjoy entrepreneurship.